to be created and maintained at the same time. Prahalad and Hamel (1990) focus directly on these dynamics by introducing the concept of core compe- tence. They acknowledge that some core businesses may have the function of generating core competences exploited in other business units. Collis and Montgomery (1995, 1998) generalize this idea by focusing both on businesses and resources, understanding the existence of a virtuous cycle from busi- nesses to resources and back to businesses, generating a coherent corporate model that improves the performance of the underlying businesses.
Martin and Eisenhardt (2001) also consider a time dimension by defining a cross-business synergy as the value that is created, over time, by the sum of the businesses together relative to what their value would be separately. They suggest that the specific sources of cross-business synergy are constantly changing as markets evolve, and that we should look at the strategic pro- cesses (a dynamic concept) to understand the creation of new synergies. Two strategic processes that are especially relevant in the multibusiness firm are knowledge transfer (i.e., deployment of experience, skills, information, rou- tines) and co-evolving (i.e., the business unit processes of routinely changing the collaborative links and relationships among the business units to exploit changing market opportunities).
In sum, although static and dynamic reinforcements are important, we focus more on the dynamic version, both because it has not been analyzed in detail elsewhere and because it is important to determine the success of the CL business model reconfigurations. One of our contributions over existing literature is to make a more explicit treatment of dynamic reinforcement by stressing the relationship between choices and consequences, and the pos- sible emergence of new resources and capabilities through time, which are specially relevant when analyzing corporate models because the choices in one BL business model can have consequences that affect other BL busi- ness models and the whole corporate model. This endogenous emergence of resources and capabilities can be the result of an innovative corporate model that seeks to generate these resources through its business scope and organi- zational-structure choices. Moreover, the emergence of these resources and capabilities can support the sustainable growth of innovations at the CL busi- ness model level. Going back to LAN’s case, the growing revenues provided by cargo operations enables a better service to passengers and vice versa, increasing the customers’ willingness to pay for both offerings, and fostering a competitive advantage that is difficult for competitors to overcome.
consequences. The BL business model of business A is jointly defined by the set of choices and consequences associated with this business. Similarly, the independent business model B has a BL business model defined by its par- ticular set of choices and consequences. Therefore, we can consider, as an initial point, a company operating in these two businesses, A and B, with independent BL business models.
The company may reconfigure its set of choices to operate the same or dif- ferent sets of businesses. For instance, it can choose a different configuration of choices to jointly operate businesses A and B. This reconfiguration may be composed of different proper subsets or supersets of the union of choices associated with businesses A and B independently (e.g., because by adding a few new choices, the firm can perhaps incorporate other additional busi- nesses), or by any other possible combination of choices. CL reconfigurations involve the assessment and selection of different combinations of choices.
Because business models are made up of choices and consequences, a complete analysis must explicitly consider the consequences. By jointly per- forming businesses A and B, a firm may obtain certain consequences that are different from those obtained by undertaking both businesses separately.
Any firm should consider different combinations of the business it chooses to operate (say A and B), or it may consider operating. Each possible combina- tion of the businesses the firm chooses to operate corresponds to a different CL business model. The search for the best possible CL business model is a process of business model innovation undertaken by the firm. Out of this process, the firm defines its corporate model as the combination of choices and consequences of those businesses that allows the corporation to create and capture more value than alternative combinations.
As explained, the firm can start by exploiting the complementarities asso- ciated with the static and dynamic reinforcements between the businesses. If the company succeeds in finding a superior business model innovation, it will develop a CL business model that captures more value than the alternative corporate models it may consider. We call this extra value a systemic rein- forcement.3 We named this reinforcement as systemic because this concept
3 According to this definition, the systemic reinforcement of corporate model A is computed rela- tive to a second corporate model B. Thus, the degree of systemic reinforcement exhibited by a given corporate model varies depending on the particular corporate model used for the comparison. An alternative approach to deal with this issue is to always use the corporate model with independent BL business models for the comparison. Systemic reinforcement would then be defined as the excess value obtained by the firm by crafting its corporate model differently from operating each of its businesses as independent BL business models. Note that both definitions are closely related. In par- ticular, given the systemic reinforcements of two corporate models compared to a corporate model with independent BL business models, we can easily compute (through subtraction) the systemic reinforcement of one corporate model relative to the other. For example, consider a firm operat- ing corporate model A, which has systemic reinforcement $250 when compared to the corporate model with independent BL business models. Suppose that a different corporate model, corporate model B, has systemic reinforcement $150 when compared to that same reference. Then, the sys- temic reinforcement of corporate model A relative to B is $250–$150 = $100. In this chapter, we use the relative-form definition because it is simpler and easier to understand and to act on.
is related to the idea that systems and their properties should be viewed as wholes, not as collections of individual parts. Any gain in systemic reinforce- ment above the one obtained by purely exploiting static and dynamic rein- forcements has to be associated with the overall configuration of choices and consequences of the innovative CL business model. For instance, some con- sequences of the joint cargo–passenger business model in LAN’s case are the decreasing probability of entry into LAN’s markets because of its more ample route network, and the increasing attractiveness for LAN of entering into new businesses, such as express mail delivery. While these additional gains can partly be explained by static and dynamic reinforcements among particular subsets of LAN’s choices, it is the whole set of choices and consequences that really sustain the emergence of those new consequences.
The higher value of a corporate model that innovates the crafting of busi- ness scope and organizational structure can originate in a number of (intri- cate) inter-relationships. These inter-relationships grow from the functioning of whole sets of choices (e.g., from the interaction of business units or from the emergence of endogenous resources and capabilities). As such, the concept of systemic reinforcement recognizes that the interactions between choices or businesses are not only related to the static sharing of some resources, but they can become much more complicated, for example, the acquisition of know- ledge can dynamically affect several activities/businesses simultaneously.4 As such, static, and mainly dynamic, reinforcement are key drivers of what we call systemic reinforcement.
In real life there are many possible configurations of business-scope and organizational-structure choices, and therefore there are many possible sets of consequences. The company should reconfigure its choices as long as a systemic reinforcement exists, and should stop when it is exhausted, that is, when there is no reconfiguration of choices that delivers more value.
Corporate-model innovations may be an important driver of systemic rein- forcement, for instance because they can promote the emergence of endogen- ous capabilities that can generate dynamic feedback loops or sharing of resources that are not available to competitors that implement different corporate models.
In the case of Amazon, the advantages of adding the platform business to the retail activity are not restricted to just static cost advantages, but involve the whole functioning of the joint business units, for example, through the achieve- ment of stronger network effects. The greater network of buyers and sellers, and the addition of services such as WebStore and Checkout, facilitate an expansion of the Amazon corporate model toward the offering of more services to mer- chants (e.g., IT services), which may result in more loyalty and increased switch- ing costs. The generation of rigid consequences by a joint CL business model
4 This is the case of the R&D activity in Arauco’s case. This activity spans several Arauco’s busi- nesses because it aims to genetically modify the quality of the tree in order to more efficiently pro- duce the different products manufactured by the company.
complements the concept of envelopment introduced by Eisenmann, Parker, and Van Alstyne (2011), which involves entry by one platform provider into another’s market by bundling its own platform’s functionality with that of the target’s so as to leverage shared-user relationships and common components.
Conclusions
The business model has been considered as a new unit of analysis (e.g., Zott, Amit, and Massa, 2011; Demil and Lecocq, 2010), which spans or bridges tra- ditional units of analysis, such as the firm or the network. In this chapter we posited that this unit of analysis must also consider important corporate strategy issues such as the choices of businesses and organizational struc- ture. This is important because different business scope and organizational arrangements can affect the logics of value creation and value capture at the overall corporate level, as well as at the individual BL business model level.
Innovations at the corporate-level model may foster new logics of value creation and value capture. As such, a new dimension of business model innovation is the creation of new corporate models, that is, new configura- tions of business scopes and organizational structures. Novel corporate mod- els can be a source of corporate advantage and a new way to distinguish a firm from its competitors.
An important determinant of a CL business model is the intensity of the interdependency among the firm’s businesses. This intensity is endogenous because it depends on how a company has decided to configure its corpor- ate model. Positive interactions between businesses are generally explained by static and dynamic reinforcements. Dynamic reinforcement is driven by the presence of rigid consequences, which might originate endogenous resources and capabilities that can foster difficult-to-imitate corporate model innovations. Corporate-model reconfigurations can be especially important to increase or decrease the interactions between businesses and individual choices. The achievement of static and dynamic reinforcement among the different choices and businesses requires a high level of cross-unit coordination. Managers must analyze what parts of their businesses should be integrated, what parts should be kept separated, and the appropriate levels of coordination between the businesses and their parts. Our analy- sis, based on the dynamic interactions between choices and consequences, goes one step beyond the more traditional synergy analysis, which is at the heart of the rationales for the existence of a multibusiness firm (Martin and Eisenhardt, 2001).
An important goal of corporate-model reconfigurations is the achievement of systemic reinforcement. Systemic reinforcement can originate in a num- ber of intricate inter-relationships that are the result of the functioning of a whole set of choices and not necessarily a result of the breaking down of the
company’s activities into smaller bits. Static and dynamic reinforcements are important drivers of systemic reinforcement. The concept of systemic rein- forcement illustrates the importance of considering the dynamic aspects of business model reconfiguration and innovation. By choosing the right con- figuration, a company can take advantage of positive internal interactions among businesses.
The development of corporate models that create systemic reinforce- ment is complex. It is an intricate exercise of design where organizational and management innovation can be necessary. It usually involves difficult balances, compromises, and tradeoffs that require complex allocations of decision rights and sophisticated management systems. In addition, tim- ing is very important. Until some rigid consequences reach a particular level, perhaps some solutions are not yet possible or feasible. Therefore, one needs dynamic organ izing more than static organizational design. All of this implies constant change and self-renewal.
Finally, fluid boundaries are usually involved, generating novel and inter- esting tradeoffs where issues of contracting should be combined with the relevance of the activities for the good working of the value loops in the dif- ferent businesses inside the corporation (Kogut and Zander, 1992). Therefore, standard transaction cost reasoning (Williamson, 1975, 1991) will have to be complemented with our business model view of corporate models to search for the right boundaries of the firm and/or relationships with possible partners (Jacobides and Billinger, 2006).
It is important to realize that the corporate level is the adequate level for business model innovation. Of course, this seems quite obvious when the change on the different business models is due to a change in the corporate model. However, even when the innovation is in one individual business model, the business level can have problems with implementing such change and it needs to be initiated at the corporate level. Thus, factors associated with organizational structures (Chandler, 1977; Williamson, 1975), control of business unit performance and of coordination and cohesiveness of busi- ness units (Bowman and Helfat, 2001), and the role of top management teams in corporate transformations (Hambrick, Nadler, and Tushman, 1998) are important to determine corporate performance in relation to business model innovation.
Value creation through CL business models involves a very complex, interconnected set of exchange relationships and activities among eventu- ally multiple business units. To excel in this difficult arena some companies, as the ones mentioned in this chapter, develop a dynamic capability: the renewal of the corporate model to take advantage of the opportunities feasible at each point in time and made feasible by the accumulated rigid consequence of their past and current CL business models. We hope the dis- cussion presented in this chapter helps to identify some important issues to be taken into account when analysing a business model innovation with a corporate view.
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Understanding Management Models
Going Beyond “What” and “Why”
to “How” Work Gets Done in Organizations
julian birkinshaw and shaz ansari
Over the last decade, the term ‘business model’ has been increasingly used by executives, consultants, and academics. The term came into popular usage during the dot-com revolution, as new online companies started to compete with very different revenue and costs structures to traditional bricks-and- mortar companies. The term was subsequently applied much more widely, and nowadays it is used to refer, in essence, to the basic choices a firm makes regarding its revenues and costs, and thereby its formula for making money.
Within a given industry, say airlines, there will often be two or three dis- tinct business models co-existing. A critical element of strategic thinking for executives is to be clear on their business model, as many other decisions flow from that basic choice.
The academic literature on business models is now quite extensive. A con- cept distinct from strategy (Casadesus-Masanell and Ricart, 2010) which is a description, plan, or process for how to move from the current situation to a desired future state, a business model is “a system of interdependent activi- ties” which together comprise the way in which a firm does business and cre- ates value (Zott and Amit, 2010: 216; Arend, 2013). In other words, it is “the translation of a company’s strategy into a blueprint of the company’s logic of earning money” (Osterwalder, 2004: 14).
A key challenge for firms, and an important theme in this literature, is the concept of business model innovation, that is, how a firm changes its busi- ness models. While many innovative business models are created by start-up firms, there are also cases of established firms experimenting with new busi- ness models as a way of responding to or forestalling the competitive threats from start-ups (Markides, 2000). This process of business model innovation is risky, as firms are restricted by path dependencies, and institutional and